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Bank Sight Drafts in Oil and Gas Leasing

A common practice among oil and gas companies is to offer a bank sight draft as the form of bonus payment for executing an oil and gas lease. Every day in America mineral owners open their mail to find an initial oil and gas lease proposal along with a sight draft as payment. It looks similar to a check, but it is not.

Bank Sight Draft Definition

The bank draft, sometimes referred to as a sight draft (or even 30 day sight draft) is an instrument guaranteeing payment to a party within a certain time window, so long as certain conditions are met. In the case of oil and gas leasing, the condition is based upon whether or not the oil company confirms that the mineral title to your property is sufficiently sound. In short, the oil company is doing what it can to minimize its exposure to paying a lease bonus on minerals to which title is not 100% sure. It’s a reasonable business practice from their perspective, yet there are different alternatives that are often agreeable to all parties. Most squabbling regarding bank drafts between oil companies and mineral owners emanates from simple confusion or ignorance as to how bank drafts work.

How Bank Drafts Work

Instructions received with a lease and a draft will usually contain one of two directives: that you execute both and deliver both to your local bank for processing, or in some cases they’ll ask you to return the signed lease to them, and deposit the bank draft at your local bank. We suggest to not do the latter. The signed lease is better held in escrow at the bank so that it will be returned to you in the event the oil company decides not to pay (honor) it. If an oil company decides not to follow through and pay the draft, it is generally because of questionable title, but sometimes because they’ve simply decided this property is no longer desired.

Why Oil Companies Like to Use Sight Drafts

Sight drafts call for a specific amount of time, usually 30 days, in which they are to be paid. It is this period of time that the company uses to verify title. The reason companies like this is simple – it allows them the flexibility to have the property committed to them, without having yet had to pay the lease bonus. It should go without saying that the company wouldn’t normally go about all the trouble to get a lease in your hands if they didn’t have a pretty strong desire to close the deal. And of course, no company wants to pay for leasing minerals with questionable title, the investigation of which usually takes place within the proposed 30 day period following the return of the executed mineral lease and draft.

Sight Draft Sample

The language below represents an example of a bank draft form:

On approval of lease or mineral deed described hereon, and on approval of title to same by drawee not later than (30,15, other) days after arrival of this draft at collecting bank,

PAY TO THE ORDER OF (LESSOR) xx.00 DOLLARS. This draft is drawn to pay for Oil and Gas Lease or Mineral Deed dated ___ and covering ___ acres, __________ County, State.

The drawer, payee and endorsees hereof, and the grantors of the lease or mineral deed described hereon, do hereby constitute and appoint the collecting bank as escrow agent to hold this draft for the time above specified subject to acceptance of payment hereof by the drawee, within said time, and without any right of the drawer, payee or endorsers hereof, or said grantors, to recall or demand return of this draft prior to the expiration of the above specified time, and there shall be no liability whatsoever to the collecting bank for refusal to return the same prior to such expiration.

In the event this draft is not paid within said time, the collecting bank shall return the same to forwarding bank and no liability for payment or otherwise shall be attached to any of the parties hereto.

Remember, this is only a sample of a draft form – the one you see may be slightly different, but its purpose is the same.

Alternatives to Accepting Bank Sight Drafts

Assuming that you’re satisfied with and ready to execute the lease, one alternative is to simply state that you’ll exchange the executed lease for a check or cashiers check. In other words, you’re saying to the oil company that they need to have done their title work sufficiently to the point that they’re willing to come out of pocket with the lease bonus simultaneous with you handing them a signed lease. Another alternative is to negotiate for a shorter window of time, say 10 or 15 days, in which the oil company must act on the draft.

Another point to consider with drafts: while many banks are familiar with processing drafts as payment for oil and gas leases, some are not. Prior to depositing a draft (with the lease), talk specifically with the person or department who will be handling this for you. Make sure there is clear communication as to exactly how the process works.

Additional Reading